Current scenario of venture capital


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Current scenario of venture capital

  1. 1. CONTEMPORARY ISSUE ON SEMINAR A STUDY ON “Current scenario of Venture Capital” 1
  2. 2. PrefaceThe underlying aim of the seminar on contemporary issue as anintegral part of MBA program is to provide the students with practicalaspects of the organization – working environment.Such type of presentation helps a student to visualize and realizeabout the congruencies between the theoretical learning in thepremises of college and actual followed by the organization. It givesthe knowledge of application aspect of the theories learnt in theclassroom.The seminar project in “Current scenario of Venture capital” is acomplete experience in itself, which provide me with theunderstanding. This has become as inspirable of my knowledge ofmanagement being learned in MBA program. 2
  3. 3. INDEX1.Introduction2.Concept of venture capital3.History4.Role within venture capital firm5.Key factor of venture capital6.Advantages of venture capital7.Method of venture capital financing8.Process of venture capital9.Venture capital scenario of India10. Sector of Interested11. Webliography / bibliography 3
  4. 4. I. INTRODUCTIONVENTURE: A business project or activity specially one that involves risk.CAPITAL: Fund employed in any business activity. Most important factor of production. No economic entity can function without capital.VENTURE CAPITAL: Venture capital is a type of private equity capital typically provided byprofessional, outside investors to new, growth businessesVENTURE CAPITALISTS: 4
  5. 5. A venture capitalist (VC) is a person who makes such investments,these include wealthy investors, investment banks, other financialinstitutions other partnerships.CONCEPT: vvvv VENTURE VENTURE VENTURE CAPITAL CAPITAL CAPITAL Drives new Is risky but creates People oriented industries wealth. Growth oriented Exit oriented Internationally oriented Venture capital is a means of financing fast-growing private companies.Finance may be required for: The start up, Development/ expansion, & Modernization Of a company. Growing businesses always require capital. There are anumber of different ways to fund growth. These include the owners own capital, arranging debt finance orseeking an equity partner, as is the case with venture capital.With venture capital, the venture capitalist acquires an agreed proportion of 5
  6. 6. the equity of the company in return for the requisite funding. Equity financeoffers the significant advantage of having no interest charges. It is patientcapital that seeks a return through long-term capital gain rather thanimmediate and regular interest payments. Venture capital investors are exposed, therefore, to the risk of thecompany failing. As a result the venture capitalist have to invest incompanies that have the ability to grow very successfully and give higher-than-average returns to compensate for the risk. Venture Capital may be a viable source of financing for a business.While they generally invest in businesses that are more established andongoing, some do fund start-ups. In general they tend to invest in high-technology businesses such as research and development, electronics andcomputers. Venture Capitalists deal more in large sums of money,numbering into the millions of dollars, so they are generally well suited tobusinesses that are going grand from the start or have grown and requiregigantic expansionTASKS OF VENTURE CAPITALISTS:When venture capitalists invest in a business they : • Become part-owners and typically require a seat on the companys board of directors. • They tend to take a minority share in the company and usually do not take day-to-day control. • Professional venture capitalists act as mentors and aim to provide support and advice on a range of management and technical issues. • Assist the company to develop its full potential. The management support is the most important contribution of a venture capitalist. There are many 6
  7. 7. sources of capital, but only a venture capitalist canprovide experienced management input gained byhelping many other companies successfully conquer theinevitable problems and growing pains. 7
  8. 8. HISTORYBeginnings of modern venture capital: The earliest origins of venture capital can be traced back to the medievalIslamic mudaraba partnership. In terms of protecting the entrepreneur,sharing the risks, losses and profits the two systems of finance areremarkably similar. General Georges Doriot is considered to be the father of the modernventure capital industry. • In 1946, Doriot co-founded American Research and Development Corporation (AR&DC) with Ralph Flanders, Karl Compton and others, the biggest success of which was Digital Equipment Corporation. 8
  9. 9. • When Digital Equipment went public in 1968 it provided AR&DC with 101% annualized Return on Investment (ROI). AR&DC’s $70,000 USD investment in Digital Corporation in 1957 grew in value to $355 million USD. • It is commonly accepted that the first venture-backed startup is Fairchild Semiconductor, funded in 1959 by Venrock Associates. Venture capital investments, before World War II, were primarily the sphere of influence of wealthy individuals and families. • Small Business Administration 1958. One of the first steps toward a professionally-managed venture capital industry was the passage of the Small Business Investment Act of 1958. The 1958 Act officially allowed the U.S. Small Business Administration (SBA) to license private "Small Business Investment Companies" (SBICs) to help the financing and management of the small entrepreneurial businesses in the United States. Passage of the Act addressed concerns raised in a Federal Reserve Board report to Congress that concluded that a major gap existed in the capital markets for long-term funding for growth-oriented small businesses. Facilitating the flow of capital through the economy up to the pioneering small concerns in order to stimulate the U.S. economy was and still is the main goal of the SBIC program today. Generally, venture capital is closely associated with technologicallyinnovative ventures and mostly in the United States. Due to structuralrestrictions imposed on American banks in the 1930s there was no privatemerchant banking industry in the United States, a situation that was quiteexceptional in developed nations. As late as the 1980s Lester Thurow, a noted economist, decried theinability of the USAs financial regulation framework to support anymerchant bank other than one that is run by the United States Congress inthe form of federally funded projects. These, he argued, were massive inscale, but also politically motivated, too focused on defense, housing and 9
  10. 10. such specialized technologies as space exploration, agriculture, andaerospace. US investment banks were confined to handling large M&Atransactions, the issue of equity and debt securities, and, often, the breakupof industrial concerns to access their pension fund surplus or sell offinfrastructural capital for big gains. Not only was the lax regulation of this situation very heavily criticized atthe time, this industrial policy differed from that of other industrializedrivals—notably Germany and Japan—which at that time were gainingground in automotive and consumer electronics markets globally. However,those nations were also becoming somewhat more dependent on centralbank and elite academic judgment, rather than the more diffuse way thatpriorities were set by government and private investors in the United States. 10
  11. 11. THE GROWTH OF SILICON VALLEYSlow Growth in 1960s & early 1970s, and the First Boom Year in 1978: During the 1960s and 1970s, venture capital firms focused theirinvestment activity primarily on starting and expanding companies. Moreoften than not, these companies were exploiting breakthroughs in electronic,medical or data-processing technology. As a result, venture capital came tobe almost synonymous with technology finance. Venture capital firms suffered a temporary downturn in 1974, when thestock market crashed and investors were naturally wary of this new kind ofinvestment fund.1978 was the first big year for venture capital. The industryraised approximately $750,000 in 1978. 11
  12. 12. Highs & Lows of the 1980s: In 1978, the US Labor Department reinterpreted ERISA legislation andthus enabled this major pool of pension fund money to invest in alternativeassets classes such as venture capital firms. Venture capital financing tookoff. 1983 was the boom year - the stock market went through the roof andthere were over 100 initial public offerings for the first time in U.S. history.That year was also the year that many of todays largest and most prominentVC firms were founded. Due to the excess of IPOs and the inexperience of many venture capitalfund managers, VC returns were very low through the 1980s. VC firmsretrenched, working hard to make their portfolio companies successful. Thework paid off and returns began climbing back up.The dot com boom: The late 1990s were a boom time for the globally-renowned VC firms onSand Hill Road in the San Francisco Bay Area. A number of large IPOs hadtaken place, and access to "friends and family" shares was becoming a majordeterminer of who would benefit from any such Common investors wouldhave had no chance to invest at the strike price in this stage. The NASDAQ crash and technology slump that started in March 2000shook some VC funds significantly by the resulting disastrous losses fromovervalued and non-performing startups. By 2003 many firms were forced to write off companies they had fundedjust a few years earlier, and many funds were found "under water";( themarket value of their portfolio companies were less than the invested value).Venture capital investors sought to reduce the large commitments they hadmade to venture capital funds. By mid-2003, the venture capital industrywould shrivel to about half its 2001 capacity. Nevertheless, PricewaterhouseCoopers MoneyTree Survey shows thattotal venture capital investments hold steady at 2003 levels through thesecond quarter of 2005. The revival of an Internet-driven environment 12
  13. 13. (thanks to deals such as eBays purchase of Skype, the News Corporationspurchase of, and the very successful IPOs) have helped to revive the VC environment.ROLES WITHIN A VENTURE CAPITAL FIRM1. Venture capital general partners: (Also known in this case as "venturecapitalists" or "VCs") are the executives in the firm. In other words theinvestment professionals. Typical career backgrounds vary, but VCs comefrom either an operational or a finance background. VCs with an operational background tend to be former chiefexecutives at firms similar to those which the partnership finances and othersenior executives in technology companies.VCs with finance backgroundscome from investment banks, M&A firms, and other firms in the corporateinvestment and finance space.2. Limited partners: Investors in venture capital funds are known as limitedpartners. This constituency comprises both high net worth individuals andinstitutions with large amounts of available capital, such as state and privatepension funds, insurance companies, and pooled investment vehicles,called fund of funds or mutual funds.3. Venture partners and entrepreneur-in-residence (EIR): Otherpositions at venture capital firms include venture partners andentrepreneur-in-residence (EIR).Venture partners "bring in deals" andreceive income only on deals they work on (as opposed to general partnerswho receive income on all deals). EIRs are experts in a particular domain and perform due diligence onpotential deals. EIRs are engaged by VC firms temporarily (six to 18months) and are expected to develop and pitch startup ideas to their hostfirm (although neither party is bound to work with each other). Some EIRs 13
  14. 14. move on to roles such as Chief Technology Officer (CTO) at a portfoliocompany. 4. Associate: The "associate" is the typical apprentice within a venture capital firm. After a few successful years, an associate may move up to the "senior associate" position. The next step from senior associate is "principal," typically a partner track position. Alternatively, there are many pre-MBA associate roles that are used solely for the purpose of deal sourcing, and the associate is usually expected to move on after two years. STRATEGIC ROLES Serving Board Business Consultant Financier SOCIAL/ SUPPORTIVE • Coach/ Mentor • Conflict resolver. NETWORKING ROLES • Management recruiter • Professional contact • Industrial contact 14
  15. 15. FEATURES OF VENTURE CAPITALThe main features of venture capital are:Long-time horizon: In general, venture capital undertakings take a longertime — say, 5-10 years at a minimum — to come out commerciallysuccessful; one should, thus, be able to wait patiently for the outcome of theventure.Lack of liquidity: Since the project is expected to run at start-up stage forseveral years, liquidity may be a greater problem.High risk: The risk of the project is associated with management, productand operations. Unlike other projects, the ones that run under the venture finance may besubject to a higher degree of risk, as their result is uncertain or, at best,probable in nature.High-tech: Venture capital finance caters largely to the needs of first-generation entrepreneurs who are technocrats, with innovative technologicalbusiness ideas that have not so far been tapped in the industrial field. However, a venture capitalist looks not only for high-technology but theinnovativeness through which the project can succeed.Equity participation and capital gains: A venture capitalist invests hismoney in terms of equity or quasi-equity. He does not look for any dividendor other benefits, but when the project commercially succeeds, then he can 15
  16. 16. enjoy the capital gain which is his main benefit. Otherwise, he will be losinghis entire investment.Participation in management: Unlike the traditional financier or banker,the venture capitalist can provide managerial expertise to entrepreneursbesides money. Since many innovations and inventions cannot be commercialized due tolack of finance, venture capital finance acts as a strong impetus forentrepreneurs to develop products involving newer technologies and tocommercialize them. Venture capital has also gained in importance as a mechanism for therehabilitation of sick companies. Moreover, venture capitalists also assistsmaller units in upgrading their technology.KEY FACTORS FOR THE SUCCESS:The key factors for the success of any project under the consideration of aventure capitalist are: • Clear and objective thinking; • Operational experience, especially in a start-up; • Firm grasp of numbers of numbers; • People management skills; • Ability to spot technology and market trends; • Wide network of contacts; • Knowledge of all facets of business — marketing, Finance and HR; • Judgment to evaluate them on the basis of integrity and ability; • Patience to pursue the final goal; • Drive to guide budding entrepreneurs; and 16
  18. 18. ADVANTAGES OF VENTURE CAPITAL Venture capital has made significant contribution to technologicalinnovations and promotion of entrepreneurism. Many of the companies likeApple, Lotus, Intel, Micro etc. have emerged from small business set up bypeople with ideas but no financial resources and supported by venturecapital. There are abundant benefits to economy, investors and entrepreneursprovided by venture capital.Economy Oriented- • Helps in industrialization of the country • Helps in the technological development of the country • Generates employment • Helps in developing entrepreneurial skillsInvestor oriented- • Benefit to the investor is that they are invited to invest only after company starts earning profit, so the risk is less and healthy growth of capital market is entrusted. • Profit to venture capital companies. • Helps them to employ their idle funds into productive avenues.Entrepreneur oriented: • Finance - The venture capitalist injects long-term equity finance, which provides a solid capital base for future growth. The venture capitalist may also be capable of providing additional rounds of funding should it be required to finance growth. 18
  19. 19. • Business Partner - The venture capitalist is a business partner, sharing the risks and rewards. Venture capitalists are rewarded by business success and the capital gain. • Mentoring - The venture capitalist is able to provide strategic, operational and financial advice to the company based on past experience with other companies in similar situations. • Alliances - The venture capitalist also has a network of contacts in many areas that can add value to the company, such as in recruiting key personnel, providing contacts in international markets, introductions to strategic partners and, if needed, co-investments with other venture capital firms when additional rounds of financing are required. • Facilitation of Exit - The venture capitalist is experienced in the process of preparing a company for an initial public offering (IPO) and facilitating in trade sales. ADVANTAGESENTREPRENEUR ECONOMY INVESTOR ORIENTED 19
  20. 20. WHAT DO VENTURE CAPITALISTS LOOK FOR WHILEINVESTING?1. A GROWING MARKET: The venture capitalists see whether thecompany is targeting a substantial and rapidly growing market. Does thecompany have a reasonable chance to successfully enter the market andobtain a strong market position?2. A UNIQUE PRODUCT: Is the company having a proprietary ordifferentiated product? Does the product offer benefits over existingproducts? Does it have patent or other proprietary protection to forestallcompetitors?3. IPO CANDIDATE OR ACQUISITION TARGET: Whether the companyhas the possibility of growing quickly and becoming an attractive acquisitiontarget or IPO candidate? Venture capitalists are concerned about how theywill realize liquidity and receive value for their investment.4. SOUND BUSINESS PLAN: Is the companys strategy and business plansound? Venture capitalists expect to see a well-thought-out, coherentbusiness plan.5. SIGNIFICANT GROSS PROFIT MARGINS: Can the product or servicegenerate significant gross profit margins (40 percent or more)? Large profitmargins give a company room for error and enhance its attractiveness for apossible IPO or acquisition.6. HOME RUN POTENTIAL: Finally, the venture capitalist wants to seethe possibility of hitting a "home run" by investing in the company. Most 20
  21. 21. venture capitalists wont be interested unless the company can grow to atleast $25 million in sales within five years.. METHODS OF VENTURE FINANCING A pre-requisite for the development of an active venture capital industryis the availability of a variety of financial instruments which cater to thedifferent risk-return needs of investors. They should be acceptable toentrepreneurs as well.Venture capital financing in India took four forms:- • Equity • Conditional Loan • Convertible Debentures • Cumulative Convertible Preference ShareEquity:- All VCFs in India provides equity. When a venture capitalist contributesequity capital, he acquires the status of an owner, and becomes entitled to ashare in the firm’s profits as much as he is liable for losses. The advantage of the equity financing for the company seeking venturefinance is that it does not have the burden of serving the capital, as dividendswill not be paid if the company has no cash flows.The advantage to the VCFs is that it can share in the high value of theventure and make capital gains if the venture succeeds.Conditional Loans:- 21
  22. 22. A conditional loan is repayable in the form of a royalty after the ventureis able to generate sales. No interest is paid on such loans. In India, VCFscharged royalty ranging between 2-15%.Convertible Debentures & Cumulative Convertible Preference Shares:- Convertible Debentures and Convertible Preference Shares require anactive secondary market to be attractive securities from the investors’ pointof view. In the Indian context, both VCFs and entrepreneurs earlier favored afinancial package which has a higher component of loan. This was becauseof the promoter’s fear of loss of ownership and control to the financier andbecause of the traditional reluctance and conservation of financier to share inthe risk inherent in the use of equity.Cumulative Convertible Preference Shares are particularly attractive in theIndian context since CPP shareholders do not have a right to vote. They are,however, entitled to voting if they do not receive dividend consequently fortwo years. 22
  23. 23. PROCESS OF VENTURE CAPITAL Venture capital investment activity is a sequential process involving fivesteps:1. Deal origination2. Screening3. Evaluation or due diligence4. Deal structuring5. Post-investment activities and exit 23
  24. 24. POST INVESTMENT ACTIVIES/ EXIT DEAL STRUCTURING DUE DILIGENCE SCREENING DEAL ORIGINATION1. Deal origination A continuous flow of deals is essential for the venturecapital business. Deals may originate in various ways. Referral system is animportant source of deals. Deals may be referred to the VCs through theirparent organizations, trade partners, industry associations, friends etc. The venture capital industry in India has become quite proactive in itsapproach to generating the deal flow by encouraging individuals to come upwith their business plans. Consultancy firms like Mckinsey and ArthurAnderson have come up with business plan competitions on an all Indiabasis through the popular press as well as direct interaction with premiereducational and research institutions to source new and innovative ideas.The short listed plans are provided with necessary expertise through peoplewho have experience in the industry.2. Screening VCFs carry out initial screening of all projects on the basis ofsome broad criteria. For example the screening process may limit projects toareas in which the venture capitalist is familiar in terms of technology, or 24
  25. 25. product, or market scope. The size of investment, geographical location andstage of financing could also be used as the broad screening criteria.3. Evaluation or due diligence Once a proposal has passed through initialscreening, it is subjected to a detailed evaluation or due diligence process.Most ventures are new and the entrepreneurs may lack operating experience.Hence a sophisticated, formal evaluation is neither possible nor desirable. The VCs thus rely on a subjective but comprehensive, evaluation. VCFsevaluate the quality of the entrepreneur before appraising the characteristicsof the product, market or technology. Most venture capitalists ask for abusiness plan to make an assessment of the possible risk and expected returnon the venture. Following points are taken into consideration whileperforming due diligence. These include- • BACKROUND • MARKET AND COMPETITORS • TECHNOLOGY AND MANUFACTURING • MARKETING AND SALES STRATEGY • ORGANIZATION AND MANAGEMENT • FINANCE AND LEGAL ASPECT Investment Valuation The investment valuation process is aimed at ascertaiing an acceptable price for the deal. The valuation process goes through the following steps: • Projections on future revenue and profitability • Expected market capitalization • Deciding on the ownership stake based on the return expected on the proposed investment The pricing thus calculated is rationalized after taking in to consideration various economic scenarios, demand and supply of capital, founders/management teams track record, innovation/ 25
  26. 26. unique selling propositions (USPs), the product/service size of the potential market, etc.4. Deal Structuring Once the venture has been evaluated as viable, theventure capitalist and the investment company negotiate the terms of thedeal, i.e. the amount, form and price of the investment. This process istermed as deal structuring. The agreement also includes the protective covenants and earn-outarrangements. Covenants include the venture capitalists right to control theinvestee company and to change its management if needed, buy backarrangements, acquisition, making initial public offerings (IPOs) etc, Earn-out arrangements specify the entrepreneurs equity share and the objectivesto be achieved. Venture capitalists generally negotiate deals to ensure protection of theirinterests. They would like a deal to provide for: • A return commensurate with the risk • Influence over the firm through board membership • Minimizing taxes • Assuring investment liquidity • The right to replace management in case of consistent poor managerial performance. The investee companies would like the deal to be structured in such away that their interests are protected. They would like to earn reasonablereturn, minimize taxes, have enough liquidity to operate their business andremain in commanding position of their business. There are a number of common concerns shared by both the venturecapitalists and the investee companies. They should be flexible, and have astructure, which protects their mutual interests and provides enoughincentives to both to cooperate with each other. The instruments to be used in structuring deals are many and varied. Theobjective in selecting the instrument would be to maximize (or optimize)venture capitals returns/protection and yet satisfy the entrepreneurs 26
  27. 27. requirements. The different instruments through which a Venture Capitalistcould invest a company include: Equity shares, preference shares, loans,warrants and options.5. Post-investment Activities and Exit Once the deal has been structuredand agreement finalized, the venture capitalist generally assumes the role ofa partner and collaborator. He also gets involved in shaping of the directionof the venture. This may be done via a formal representation of the board ofdirectors, or informal influence in improving the quality of marketing,finance and other managerial functions. The degree of the venture capitalists involvement depends on his policy.It may not, however, be desirable for a venture capitalist to get involved inthe day-to-day operation of the venture. If a financial or managerial crisisoccurs, the venture capitalist may intervene, and even install a newmanagement team. Venture capitalists typically aim at making medium-to long-term capitalgains. They generally want to cash-out their gains in five to ten years afterthe initial investment. They play a positive role in directing the companytowards particular exit routes. A venture capitalist can exit in four ways: • Initial Public Offerings (IPOs) • Acquisition by another company • Repurchase of the venture capitalist ? share by the investee company VENTURE CAPITAL SCENARIO IN INDIA 1972: The Committee on Development of Small and Medium Entrepreneurs, under the chairmanship of Mr. R. S. Bhatt, first highlighted venture capital financing in India.1975: venture capital financing was introduced in India by thefinancial institutions with the inauguration of Risk Capital Foundation(RCF), sponsored by IFCI with a view to encouraging technologists andprofessionals to promote new industries. 27
  28. 28. 1976: The seed capital scheme was introduced by IDBI.1983: The Technology Policy statement of the Government set theguidelines for technological self-reliance by encouraging thecommercialization and exploitation of technologies developed in thecountry. Till 1984 venture capital took the form of risk capital and seedcapital.1986: ICICI launched a venture capital scheme to encourage newtechnocrats in the private sector in emerging fields of high-risk technology.1986-87: the Government levied a 5 per cent cess on all know-howpayments to create a venture capital fund by IDBI. ICICI also became apartner of the venture capital industry in the same year.1988-89: • The first attempt to frame comprehensive guidelines governing venture capital funds was. Even under these guidelines, only all India financial institutions, all scheduled banks including foreign banks operating in India, and the subsidiaries of the above were eligible to set up venture capital funds/companies. • IFCI sponsored RCF was converted into the Risk Capital and Technology Finance Corporation of India Ltd. • Unit Trust of India sponsored venture capital unit schemes. State Bank of India has a venture capital scheme operated through its subsidiary SBI Caps. • ICICI flagged off a new venture capital company called Technology Development and Information Company of India with the objective of encouraging new technocrats in the private sector in high-risk areas. • The first scheme floated by Canara Bank had participation by World Bank. About the same time, two State level corporations, viz., Andhra Pradesh and 28
  29. 29. Gujarat also took initiatives to promote venture capital funds and could obtain World Bank assistance. A foreign bank set up a Venture Capital Fund in 1987. In addition, other public sector banks have participated in the equity share capital of venture capital companies or invested in schemes of venture capital funds. Several venture capital firms are incorporated in India and they arepromoted either by financial institutions, such as IDBI, ICICI, IFCI, State-level financial institutions and public sector banks, or promoted by foreignbanks/private sector financial institutions such as Indus Venture CapitalFund, Credit Capital Venture Fund, and so on. Hence, the total pool ofIndian venture capital today stands over Rs 5,000 crore. VENTURE capital, the new-age finance, is gaining importance in theIndian economy as traditional financial institutions and commercial banksare hamstrung by inadequacy of equity capital, focus on low-risk ventures,conservative approach, and delays in project evaluation. Venture capital is also often described as "the early stage financing ofnew and young enterprises seeking to grow rapidly". 29
  30. 30. From the above table we can see that venture capital is continuouslygrowing in INDIA. The venture capital sector in India is still at the crossroads and strivinghard to take off. In the recent past, many changes have been occurred in theindustry. They are: • Capital is pouring into private equity funds; • Average ticket size of VC investment is increasing; • First-generation entrepreneurs are finding it easier to raise funds; • Investors are demanding non-financial value addition; • Most States are setting up regional VC funds; • VC firms are getting professionalised; • Incubation of entrepreneurs is increasing; • VC firms are acquiring specific industry focus; and • Competition is stretching valuations. The industry can well leap into the high growth trajectory if it is giventhe necessary boost and the Government and the venture capitalists take theproper measures. Unless the challenges facing the sector are rightly addressed, VCfunding cannot meet with the kind of success it has in the developedcountries.TRENDS OF VENTURE CAPITAL IN INDIA2007 – PE/VC Trends • 31% of all investments fell into the US$10-25million category • capital investments accounted for 25% 30
  31. 31. of the private equity deals (in volume terms). • Late stage deals accounted for 35% of all dealsPE firms obtained exit routes in 65 companies,including 16 via initial public offering (IPO) • While companies based in South India attracted ahigher number of investments, their peers in WesternIndia attracted a far higher share of the pie in value terms. • Among cities, Mumbai-based companies retained thetop slot with 108 private equity investments worthalmost US$6 billion in 2007, followed by Delhi/NationalCapital Region with 63 investments worth almostUS$2.7 billion and Bangalore with 49 investments worthUS$700 million. • Citigroup was the most active investor, with a portfolioacross energy, engineering & construction,manufacturing. Other active investors include: ICICIVentures, Goldman Sachs and Helion Ventures Top Cities attracting PE Investments(2007)City No. of Deals Value(US$M)MUMBAI 109 5995Delhi/NCR* 63 2688BANGALORE 49 685CHENNAI 32 824AHMEDABAD 14 492KOLKATA 12 339HYDERABAD 41 1380PHASESPHASE I – Formation of TDICI in the 80’s and regionalfunds as GVFL & APIDC in the early 90s. 31
  32. 32. PHASE II- Entry of Foreign Venture Capital funds(VCF) between 1995-1999PHASE III- (2000 onwards). Emergence of successfulSetting the stage - Venture Capital in IndiaIndia-centric VC firms.PHASE IV –(current) Global VCs and PE firms activelyinvesting in India. 300 Funds active in the last 3 years (Government, Overseas, Corporate, Domestic) SECTORS OF INTERESTSectors of interest 32
  33. 33. IT & ITES companies continue to corner the majority share of VCinvestments - accounting for about 70% in terms of number of investments.Within IT & ITES, vertically focused BPO companies have emerged as thefavorite sector in 2007, followed by Internet-based Services (the 2006favorite), IT Servicesand Mobile Value-Added Services(M-VAS).However, gone arethe days whenVenture Capitalwassomething that wasmeant only for IT &ITEScompanies. WithintheHealthcare & Life Sciences industry for example, Clinical ResearchOutsourcing (CRO) and Biotech companies are attracting the attention ofboth specialist VC firms as well as sector-agnostic firms. 33
  34. 34. Especially interesting to VCs are sectors that tap the rising consumerspending in India. While means that they are more than willing to listen topitches from start-ups in sectors like Media, Financial Services, Food &Beverages and Retail.Hands on experience The series of delegations of US VCs that The Indus Entrepreneurs (TiE) and Silicon Valley Bank led in the years preceding 2006 played an important role in exposing and encouraging Silicon Valley VCs like KPCB, Battery Ventures, Canaan Partners, Greylock and Matrix Partners India to make direct investments in Indian companies. Sequoia Capital, ofcourse, has joined hands with Bangalore-based WestBridge Capital to createa series of India-dedicated funds for investments across various stages ofcompany development. Other VC funds with strong Silicon Valley connections - includingHelion Ventures, Nexus India Capital and IDG Ventures India -alsolaunched their funds in 2006 and are actively investing now. These VCs alsohave willing co-investors among strategic investors like Intel Capital andCisco Systems who have dedicated professionals on the ground in India. 34
  35. 35. One of the key differentiators among the new breed of VCs is that theyinclude successful entrepreneurs - like Sanjeev Aggarwal and Ashish Guptaof Helion Ventures, Alok Mittal of Canaan Partners and Avnish Bajaj ofMatrix Partners - among their investing teams. These VCs - who can trulyclaim to have "been there and done that" (in several cases in the Indiancontext as well) - can walk the talk in terms of "adding value beyond themoney".CERTAIN OTHER FACTS: • High Growth in Technology and Knowledge based Industries (KBI) • KBI growing fast and mostly global, less affected by domestic issues. • Several emerging centers of innovation – biotech, wireless, IT, semiconductor, pharmaceutical. • Ability to build market leading companies in India thatserve both global and domestic markets. • India moving beyond supplier of low-cost services to higher-value products. • Quality of entrepreneurship on ascending curve. 35
  36. 36. ISSUES FACED BY VENTURE CAPITALISTS IN INDIA1. Benefits on total income are currently available to domestic venturecapital funds under Section 10 (23) F of the Income Tax Act. As it presentlystands, the Act requires that investments are made by Venture Capital Fundsonly in equity instruments, which imposes avoidable constraints. SEBI, which regulates venture capital funds permits investment in equityand equity like instruments. All over the world, instruments such asconvertible preference shares, fully and partly convertible debentures areused for financing by venture capital companies.2. According to the Indian Venture Capital Association, there is noregulatory framework for structuring the funds. Most of the domestic fundshave been set up under the Indian Trust Act 1882. While domestic funds arerequired to follow SEBI guidelines, offshore funds are required to followRBI guidelines.3. There is an anomaly in the tax treatment between domestic and offshorefunds. Offshore funds are generally registered in Mauritius and do not payany tax whereas domestic funds have to pay maximum marginal tax. Even among domestic funds, funds settled by Unit Trust of India aretotally exempt from tax. The contention is that offshore funds which investonly in large industries are exempt from tax whereas domestic funds thatinvest in small and medium industry are taxed.4. Again, the provisions of Section 10 (23) F restrict venture capitalcompanies from investing in the services sector barring computer.5. There is a strong opinion that telecommunication and related services,computer hardware related services, project consultancy, design and testingservices, tourism related services and health related services should qualifyfor exemption under the Act for venture capital investment. 36
  37. 37. 6.There is also a view that greater flexibility should be made available toventure capital investments in unlisted securities. Interestingly, even foreigninstitutional investors are permitted to invest in unlisted debt instruments. 37
  38. 38. WEBLIOGRAPHY / - 80k 38
  39. 39. WEBLIOGRAPHY / - 80k 38